What is a production possibility curve and what does it show?
A production possibilities curve PPC is an economic model that shows the production efficiency and allocation possibilities of the economy for a given level of resources. More specifically, it describes a society's trade-off between two goods or services or two types of goods and services.
The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.
- The Production Possibilities Curve (PPC) models a two-good economy by mapping production of one good on the x-axis and production of the other good on the y-axis. The combinations of outputs produced using the best technology and all available resources make up the PPC.
- Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. An increase in economic growth caused by more efficient use of inputs (such as labor productivity, physical capital, energy or materials) is referred to as intensive growth.
- This causes output to increase, so the production possibilities curve shifts outward, or to the right. On the other hand, let's say a major war causes destruction of capital equipment in the country. This would cause output to decrease, so in this case, the production possibilities curve shifts inward, or to the left.
In the field of macroeconomics, the production possibility frontier (PPF) represents the point at which a country's economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible.
- Physical Capital or Infrastructure. Increased investment in physical capital such as factories, machinery, and roads will lower the cost of economic activity. Better factories and machinery are more productive than physical labor. This higher productivity can increase output.
- In economics, diminishing returns is the decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.
- If the PPF is a straight line as shown in the first graph, then the slope is constant. This means the opportunity cost is also constant. In real life, the PPF will not be linear, it will be a downward sloping curve because of the law of diminishing marginal returns. That's why PPC slopes downward.
The four key assumptions underlying production possibilities analysis are: (1) resources are used to produce one or both of only two goods, (2) the quantities of the resources do not change, (3) technology and production techniques do not change, and (4) resources are used in a technically efficient way.
- It is because resources like labor or capital must be relocated to produce weapons. Most of the PPF curves are concave due to the inadaptability of the resources. The law of increasing opportunity cost states: as the production of one good rises, the opportunity cost of producing that good increases.
- The four key assumptions underlying production possibilities analysis are: (1) resources are used to produce one or both of only two goods, (2) the quantities of the resources do not change, (3) technology and production techniques do not change, and (4) resources are used in a technically efficient way.
- A production possibility frontier (PPF) shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed. Opportunity Cost and the PPF. Reallocating scarce resources from one product to another involves an opportunity cost.
Updated: 16th October 2019